US Should Take New Look at Old Export Controls

I have a new column in this month’s (April 2011) issue of China Economic Review. It focuses on U.S. restrictions on high-tech exports to China, an issue that the Chinese side has raised with growing frequency in recent trade talks. While the Chinese may be overstating their case, I argue, it actually is in America’s own best interests — both in terms of economics and national security — to adopt a smarter, more flexible approach to deciding what we should sell, and not sell, to China. You can access the original version here.

Cold War relic

by Patrick Chovanec

One sure sign of a rising China is its more assertive stance in bilateral talks with the US. So last year, when US negotiators proposed that China help reduce the bilateral trade imbalance by opening up its markets to US exports, Beijing was ready with a proposal of its own: We’ll buy more American goods, if you scrap restrictions on high-tech exports. The US Cold War-style mentality, they argued, is the main thing standing in the way of more balanced trade.

Most experts consider the Chinese argument to be overblown. They estimate the annual amount of sales to China blocked by US export controls at US$2-3 billion. (The only hard number comes from a 2009 survey by the American Chambers of Commerce based in Beijing and Shanghai, which tallied US$560 million in actual lost sales). This barely puts a dent in China’s $252 billion trade gap with the US for 2010.

Nevertheless, that doesn’t mean Washington should dismiss the issue out of hand. Talk to American business executives in China and they’ll tell you that the restrictions put them at a competitive disadvantage. It may not be a silver bullet that solves the trade gap, but the Chinese do have a point: It’s high time for the US to re-evaluate its outdated system of export controls.

Control mechanism

The existing system dates back to 1949, when the US and 16 of its allies formed the Coordinating Committee for Multilateral Export Controls (CoCom) to prevent the Soviet Union from buying so-called “dual-use” technology from the West that could be converted for military use. Any CoCom member had the right to veto sales by one of its allies. Since CoCom’s members did little trade with the Soviets in any event, they had little to lose, and everything to gain, from casting its restrictive net pretty broadly.

With the collapse of the Soviet Union, CoCom was disbanded and replaced, in 1994, with the much looser Wassennar Arrangement, which is aimed at keeping sensitive military technologies out of the hands of “rogue states” like Iran, Libya, North Korea and Burma.

None of the 40 countries participating in Wassennar have any power of veto. Each ultimately makes its own decision regarding what technologies it’s willing to sell, and to whom.

But what about China? Obviously the US considers China as a potential military adversary, and would prefer to deny it whatever high-tech military advantage possible. But unlike the old Soviet Union, China is a major trading partner that offers a market that no country, including the US, can afford to ignore.

Missed opportunities

That presents Washington with two challenges. First, the cost of not selling to China has to be taken into account. In 2009, nearly 20% of America’s US$69.5 billion exports to China were in high-tech industries like aircraft, electronics, and semiconductors, which are potentially subject to export controls. These are areas where the US has a solid competitive advantage, and incredible growth opportunities. The old system simply has no mechanism for weighing these potentially immense economic benefits against equally real security concerns.

Second, just because the US decides not to sell the Chinese a certain technology, doesn’t mean that somebody else won’t sell it to them instead. CoCom worked because it presented a united front; that consensus is long gone. China isn’t even a “country of concern” under the Wassennar Arrangement. The US can’t control whether China gets its hands on a wide range of advanced “dual use” technologies – it can just deny its own companies the chance to make the sale.

The US$2-3 billion may be insignificant in the grand scheme of things, but US firms worry that export controls cast a broader shadow over their business. They fear that, given the choice, many Chinese buyers opt to work with European or Japanese suppliers rather than deal with the prospect that, somewhere down the road, they won’t be able to get what they want from an American bidder. It’s impossible to quantify how much business might be lost due to such concerns.

A wholesale abandonment of restrictions on high-tech exports in the pursuit of short-term profit would be foolish. But American policy-makers need to recognize that the game has changed, and a smarter approach is now needed for balancing the pros and cons of bringing US high-tech leadership to the Chinese market.

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But why? On the contrary, the US and its allies should greatly expand its export control list to include any technologies that indirectly build up China military and technical capabilities. Yes, that would put a big dent on all imports from China, outside of low-tech consumer stuff like shoes and underwear. But it would be a good way to reduce the rampant theft and forced transfer of technology that’s impoverishing America’s and Europe’s future generations. The Chinese would be asked to start playing by the international rules before the restrictions are gradually removed. That would be a much a better course of action for West than giving the Chinese something for nothing.

Pardon me but you don’t know anything about high tech supply chains whatsoever. *All* IP is now globalized. And America is behind — mainly due to lack of schooling in math and science — not so much due to rip-offs. Take a look at any advanced math and science program at a top U.S. university and you’ll find a dearth of native born Americans. Instead those spots have been earned, not taken, by foreigners, who opted to study instead of computer games and Britney Spears.

If you’ve ever been to India, a friendly U.S. ally, and visited their software companies, you’ll find that a lot of U.S. technology finds its way to their millenium-old trading partners — many potentially unfriendly countries in the Middle East. The French and Germans will trade with anyone who has cash. Ditto the Russians with their technology as well.

U.S. export controls policymakers should realize the horse left the barn a long time ago.

@Stuxnet,
Pardon me, but you don’t know anything about export controls whatsoever. Leaving ad-hominem attacks aside, Cocom was highly effective during the cold war. Certainly the US would need cooperation from its allies from a new regime to be effective. But that’s the way to go, not toward relaxing export controls. And to end on a friendly ad-hominem note, you don’t know anything about US education whatsoever, either. Cheers.

Cocom may have been effective during the Cold War, which insinuates how prehistoric you might be, but that was way before the proliferation of numerous technologies around the world. It used to be in Silicon Valley a startup could safely assume all its competitors were U.S. based. Not so anymore.

But continue to imagine that countries’ borders can stop any flow of education, technologies or business processes — or people. That would befit someone who is of Cocom mindset or vintage.

@Stuxnet,
Continue to imagine things never change. We had another round of globalization coupled with technological advances in the 1800s, with the railroad and telegraph, and that globalization episode never went into reverse, right?

You probably make money from the Asian supply chain, selling out your country, your kids’ future, and the intellectual capital built by previous generations for a quick buck. So of course you’ll defend the status quo. Like the realtors telling us it’s always a good time to buy, and the Wall Street analysts peddling their derivatives. Plus ca change.

@Stuxnet,
Wrong on all counts. I enjoyed our mini argument here, even though Patrick is probably cringing at the argument style in the comment section. Now that you’re down to pure personal attacks you’re no longer remotely interesting. There are much better places to see pure flaming. Cheers.

Your argument seems logic in every details.
I understand competition, but history is written from
the wining side, those lost never appreciate the more of
such intrusion.
Don’t you think competition must be based on an even
keel, how to make the field acceptable by the competitiors is
the key, this is the heated argument between China and the
U.S now.
Previous bloggers’s arguments are actually proving my point.
Are you so sure by lifting control now will benefit both
China and the U.S ?

Let me be perfectly clear: nowhere in my article do I argue for “lifting” or “removing” defense-related controls on U.S. exports to China. What I argue for is reforming the current, outdated system in a way that recognizes new realities (in particular, the willingness of the Europeans and Japanese to sell technologies to China that they might have refrained from selling to the Soviets) and given those realities, does a better job of weighing the real pros and cons of barring a particular export.

Just the other day, two Chinese nationals were indicted in the U.S. for attempting to obtain and smuggle radiation-hardened microchips to China. These items are explicitly listed on the U.S. Munitions List of prohibited exports, and I can’t imagine any circumstance under which the kind of reforms I’m talking about would “lift” protections on these and similar kinds of critical defense technologies. But there are plenty of other “dual use” technologies that are readily available in the international marketplace, where we have to ask ourselves whether a ban is really an effective way of dealing with our concerns or not.

I consider myself a hawk when it comes to U.S. national defense, and that includes defense against China as a potential adversary. But in my view, when it comes to export controls on technology, there are smarter and more effective ways of going about it than we are now.

My emphasis is on fair competition.
U.S would still get the raw deal even such “controls”
are all lifted, no need for me to repeat many unhappy
incidents here.
Never have I had any doubt of your allegiance, If my
tone of voice did offend you, I apologize.

I agree that we need to relook at the policy. It is antiquated and US companies are losing sales on technology that is readily available. I think the US needs also to put much more pressure on allies to toe the line on what should be commercially available. In addition, there needs to be much more noise about China’s horrendous record on IP protection. World class laws and little or any enforcement. Of course, it is easy for China to pursue anyone for taking state secrets but they can’t seem to enforce anything to do with a western firms’ IP rights. And furthermore, western firms do not want to antagonize the government who controls the largest growth market for their goods. So they don’t make it public, suck it up and hope that they will get some small part of the market in the future while their mainland partners steal the production technology, trademarks and other IP and set up shop just down the road (Danone/Wahaha)

Furthermore, assuming the US relents and then China will move its negotiating bar on to something else like they want to acquire companies in key strategic resource areas (like Unocal)…something that, were the situation reversed, China would never do.

We just need to be prepared for lots more copy cat production, like the Russian SU-27 fighter (Chinese J-11) or the Boeing MD80 (COMAC ARJ 21 or the Airbus A320 (AVIC 919) or high speed rail.

The US is facing a real dilemma here in trying to restrict the availability of high tech, especially defense technologies, to China. It has been done a lot but has not been very successful, at times even self-defeating, as Patrick argued in his post.

* The US had blocked the sales of four AWACS systems by Israel to China back in 2001. An enraged China went ahead with the successful development of its indigenous AWACS in record time, which were more advanced. Had the Israel deal gone through, China would not have had developed its AWACS so quickly and so advanced, ironically.

* The US had banned any US-made satellite launch by China using Chinese rocket, presumably to deny the revenue from the international satellite launch business to China. This has given the European satellite manufacturers (e.g. French) opportunities to gain more international business. China’s rocket industry is not going to be starved due to loss of some international launch orders since it has its own thriving domestic launch orders. This is a typical self-defeating policy from the US, since the US satellites had been the most advanced and, let China launch US satellites would not give China exposure to US satellite technologies.

In today’s world, it is very difficult for the US or its so-called allies (allies in what?) to limit China’s development of its own high-tech industries and defense technologies. The US does not have monopolies in many technologies and, increasingly China has the largest markets for many of the technologies – it would simply be hurting themselves if a country denies its companies opportunity to sell into China. China has been investing heavily in a lot of high tech industries, including defense industry. If you miss the opportunity, you will never has it again, as shown in the case of AWACS.

Take another example: the high-speed rail. Much fuss has been made in the western media about China copied/stole the technologies from the west. Most of these accusations are speculations/jealousy/sour grapes. China has never denied that it licensed/imported foreign technologies and made its own improvements. From the beginning, China had made it clear that the transfer/license of technologies were the precondition for business.

Obviously, the fact that China has been investing so heavily in the HSR made many people’s mouth watering: if only we could get all those orders, i.e., had we not licensed the technologies to China … This is purely wishful thinking. China would not have deployed and built HSR network on such a scale had it not mastered much of the technologies. The HSRs have had a limited deployment and future in developed countries and developing countries, which has been obvious from the decades of the HSR experiences in most of the countries. In fact, the initial order for HSRs from China were so large for the foreign manufacturers relative to their accumulative orders previously, they were happy to license/transfer the technologies. China has gambled with its own money to build the HSR on such a large scale and set by example to the world, thus the increasing interest in HSR world-wide.

So think positively, think win-win (a cliche from Chinese officials these days, but so true … 🙂 ). You’re not going to stop China from developing quickly, why not profit from it!